Miners must stop unearthing surprises

The carnage in the mining services sector continued this week with the suspension of
Forge
and a profit downgrade that wiped off a third of the market value of
Ausdrill
. There are many in the market who believe that both ­companies are prime examples of poor ­continuous disclosure.

One fund manager told Chanticleer the way Forge has dealt with the underperformance of two power station projects makes a mockery of the Australian market.

A leading broker has similar sentiments about the way Ausdrill has handled the loss of contracts that led the company to downgrade its net profit to between $35 million and $45 million for the year to June 30, 2014. Market consensus was for a net profit of about $70 million.

Strictly speaking, both companies have followed the continuous disclosure processes by the book. Both entered trading halts after notifying the market they had come across issues that would be price-sensitive.

The situation at Forge is so complex the company was forced to suspend trading in its shares until next week. Following the processes is one thing. Being across the detailed financials of the company is another.

Questions could certainly be asked about the timeliness of disclosures by Ausdrill in relation to several contracts that were lost over the past few months. Ausdrill, which is chaired by
Terry O’Connor
, said on Thursday it had lost contracts in April, May, June, October and will lose another contract in December.

A check of the disclosures made by the company to the Australian Securities Exchange make no mention of these lost contracts.

Perhaps the cumulative impact of the contracts was not know until this week.

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Ausdrill’s market disclosures over the past six months have stressed the company’s resilience and its ability to deal with its much needed deleveraging.

The company, which had net debt of $224 million at June 30, last month entered into a $300 million revolving loan facility and a $US250 million term loan facility.

These credit facilities contain particular maintenance covenants, including the ratio of EBITDA for the preceding 12-month period to net interest expense will be greater than three times. Analysts reckon Ausdrill will not breach that convenant in the first half, but may come close in the second half if it is wrong about economic conditions improving.

Ausdrill’s optimism about its prospects earlier this year at a time when the rest of the sector was under intense pressure happened to coincide with big short positions in the shares.

In August, when the company confirmed its bright outlook, the short positions accounted for 8 per cent of issued capital. The counterintuitive performance of the company resulted in a short squeeze.

The hedge funds that owned the stock were burned badly.

Few will have sympathy for them but those who bought the stock at that time will be wanting to find out why the contract losses were not disclosed.

At Forge, it would appear the company had terrible visibility of its financial position.

It told the exchange when it requested a trading halt this week: “Following its internal monthly reviews and quarterly financial re-forecast, Forge has identified concerns in relation to potential underperformance on the Diamantina Power Station and West Angelas Power Station projects that were acquired as part of the CTEC acquisition in January 2012."

No mention was made of these problems at the annual meeting in October.

If you thought the Australian market for initial public offerings (IPO) was booming, then consider the possibility that the biggest ­private market transaction since the sale of Sydney Airport will be floated.

That is a possibility, because the Queensland Government’s planned sale of ­Queensland Motorways will explore all options, including an IPO.

This transaction is almost certain to crack the record price for a public asset set by ­Sydney Airport in 2002. It was sold to the Southern Cross consortium, led by the then Macquarie Bank, for $5.6 billion.

The recent Port Botany and Port Kembla sale came close to meeting that transaction in terms of size. In the end, it sold for $5.02 billion, or 25 times earnings before interest, tax, depreciation and amortisation.

Funnily enough, that EBITDA multiple for Port Botany and Port Kembla was the same as the multiple for Sydney Airport.

Queensland Motorways, which owns five toll roads in Brisbane and is the most favoured buyer for Brisconnections assets, is believed to have EBITDA of about $275 million.

An EBITDA multiple of 20 would give a valuation of about $5.5 billion. However, an EBITDA multiple of 25 would give a value of $6.8 billion.

The final valuation will probably fall between those two numbers given the appetite for quality Australian infrastructure assets from foreign pension funds and sovereign wealth funds.

This is the great paradox of Australia’s infrastructure market. There is no shortage of buyers for assets with long-term, reliable income in geographies with solid growth.

Queensland Motorways could well be known as the Transurban of the north. That moniker will probably have the bankers involved salivating.

Transurban has an enterprise value of $14 billion and trades at about 23 times EBITDA.

However, Queensland Motorways is arguably a better asset because of the benefits of the network effect from owning all the linked toll roads in Brisbane.

It may even be attractive to Transurban.

There used to be a joke in Sydney that Macquarie would one day dominate the city’s toll roads and ensure that it clipped the ticket on every journey. That never eventuated.

But it is highly likely to occur in Brisbane.

Management changes at
Suncorp Group
provide some indication of succession planning at the insurance and banking group.

The two clear winners from the reshuffle are former chief financial officer John Nesbitt, who now heads Suncorp Bank, and Steve Johnston, who steps up from being deputy CFO to take over from Nesbitt.

Nesbitt will be seen as a potential successor to
Patrick Snowball
. He has been there every step of the way during the company’s turnaround under chief executive Patrick Snowball.

Snowball is one of those rare CEOs in Australia who has always managed to deliver what he promised.

Nesbitt is not just a numbers man. He ran private wealth at Perpetual before becoming CFO at the same company.

Johnston has been on a role at the company. He provided strategic advice to Snowball and his predecessor
John Mulcahy
.

Prior to that he worked at
Telstra
and at the Queensland Government. He is the latest executive to show that the investor relations and corporate affairs function can be a stepping stone to greater things.

The loser from the reshuffle is
David Foster
, who is leaving Suncorp after several tough years running the retail bank and running off Suncorp’s bad bank assets.

Foster, who was at Suncorp for about a decade and will stay until the end of February, will probably land a top job elsewhere in the financial services sector.